Chapter 1-5 OCC Small Business Management
3-6. Assess the feasibility of a startup idea.
•A feasibility analysis should be conducted to identify potentially fatal flaws prior to making the decision to invest the substantial time, energy, and other resources required to put together a full-scale business plan. •It's important to distinguish between a market and an industry. A market consists of all buyers of a product or service; an industry is made up of all sellers who compete for the same market. •A feasibility analysis should assess the potential of a market on two levels—the broad macro-market and the micro-market—because the long-run potential of a market niche is determined largely by the outlook for the overall market. •The industry should be assessed for its overall attractiveness (potential for profits) and the specific context of direct competition, which can greatly impact a startup's prospects for success. •Entrepreneurs are likely to be successful in a startup situation to the degree that the planned venture fits with their mission, aspirations, and tolerance for risk. •Successful entrepreneurs understand and are able to manage the factors that are critical to the operation of the enterprise, and they are able to connect with suppliers, customers, investors, and others whose involvement is crucial to the future performance of the planned venture.
3-2. Use innovative thinking to generate ideas for highpotential startups.
•A commitment to creative thinking can generate many ideas for new businesses and also help to keep an existing business fresh and moving forward. •Business ideas can be spurred by borrowing ideas from existing products and services or other industries, combining businesses to create a market opening, focusing on a problem, responding to a trend, and improving the function of an existing product or service. •Other ideas for new businesses can come from considering possible ways to make customers' lives easier, meeting customer needs in a new way, expanding the market for a product or service, offering products through a subscription service, figuring out how to cash in on the sharing economy, making a product or service "green," and tapping into new technologies.
1-1. Explain the importance of small business and entrepreneurship in our society.
Entrepreneurs who start and lead small businesses make a significant contribution to the economy and to quality of life. •There are 27.8 million small businesses in the United States with fewer than 500 employees, which account for 99.7 percent of all businesses—and 90 percent with fewer than 20 employees! •Fifty-five million people work at small businesses, representing 49 percent of all employees and 42 percent of all salaries paid to employees. •Small enterprises hire 43 percent of all high-tech employees (scientists, engineers, computer programmers, and others). •Many small companies have been going global, representing 97 percent of all exporters. •About one-fourth of the 23.5 million military veterans in the United States are interested in starting or buying their own business.
4-1. Define franchise, and have an understanding of franchise terminology.
•According to the U.S. Small Business Administration, a franchise is a business model involving a business owner (the franchisor) who licenses trademarks and methods to an independent entrepreneur (the franchisee). The franchise governs the method of conducting business between the two parties. •The franchisor also provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. •A franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards. •In product and trade name franchising, the main benefit for the franchisee is the privilege of using a widely recognized product or trademark. •In business format franchising, entrepreneurs receive an entire marketing and management system. •The franchise contract is a legal agreement between a franchisor and franchisee. •A master licensee is an independent firm or individual acting as a middleman or sales agent with the responsibility of finding new franchisees within a specified territory. •Multiple-unit ownership, in which a single franchisee owns more than one unit of a franchised business, is becoming widely used. •Some single franchisees are area developers—individuals or firms that obtain the legal right to open several outlets in a given area. •Piggyback franchising is the operation of a retail franchise within the physical facilities of a host store. •Multibrand franchising involves operating several franchise organizations within a single corporate structure. •Co-branding brings two or more franchise brands together within a single enterprise.
3-4. Explain broad-based strategy options and focus strategies.
•Broad-based strategy options include both cost-based and differentiation-based strategies. •A cost-based strategy requires the firm to become a lowcost provider within the market while still making a profit. •Product or service differentiation emphasizes the uniqueness of a firm's product or service. •Focusing on a specific market niche is a strategy that small firms often use successfully. •A focus strategy may involve restricting focus to a single subset of customers, emphasizing a single product or service, limiting the market to a single geographical region, or concentrating on product or service superiority. •Entrepreneurs can exploit very different market niches within the same general industry. •In selecting a particular focus strategy, an entrepreneur determines the basic direction of the business, and this affects the very nature of the venture. •The benefits of a focus strategy can diminish when the firm becomes too specialized, the strategy is imitated, the target segment becomes unattractive or demand dwindles, the segment loses its uniqueness, or new firms subsegment the industry.
1-6. Explain the concept of an entrepreneurial legacy and its challenges.
•Building a legacy is an ongoing process that begins with the launch of the firm and continues throughout its operating life. •An entrepreneur's legacy includes not only money and material possessions but also nonmaterial things such as personal relationships and values. •Part of the legacy is the company's contribution to the community. •A worthy legacy includes a good balance of values and principles important to the entrepreneur.
4-4. List four reasons for buying an existing business, and describe the process of evaluating an existing business.
•Buying an existing firm can reduce uncertainties. •In acquiring an existing firm, the entrepreneur can take advantage of the firm's ongoing operations and established relationships with customers and suppliers. •An existing business may be available at a bargain price. •Another reason for buying an existing business is that an entrepreneur may be in a hurry to start an enterprise. •Investigating a business requires due diligence. •A buyer should seek the help of outside experts, the two most valuable sources of outside assistance being accountants and lawyers. •The buyer needs to investigate why the seller is offering the business for sale. •The company's financial statements and tax returns for the past three to five years should always be examined. •Other quantitative factors in valuing a business include state sales tax statements, supplier invoices, customer receipts, and the company's bank statements. •Nonquantitative factors in determining the value of a business for sale include the market, competition, future community development, legal commitments, union contracts, buildings, and product prices. •The terms of purchase are an important part of the negotiation between buyer and seller. •Documents completed during the closing include a bill of sale, tax and other government forms, and agreements regarding future payments and related guarantees to the seller.
2-2. Explain how integrity applies to various stakeholder groups.
•Closely tied to integrity are ethical issues, which go beyond what is legal or illegal to include more general questions of right and wrong. •When they make business decisions, entrepreneurs must consider the interests of all stakeholder groups, in particular those of the owners, customers, employees, the community, and the government, among others. •A company's owners have a clear and legitimate right to benefit from the financial performance of the business. •Those companies that take customers seriously and serve them well are likely to have more of them. •Showing proper appreciation for employees as human beings and as valuable members of the team is an essential ingredient of managerial integrity. •Most people consider an ethical small business to be one that acts as a good citizen in its community. •Research suggests that most small business owners exercise great integrity, but some are apt to cut corners when it comes to social responsibilities if profits will be affected. •Entrepreneurs must obey governmental laws and follow applicable regulations if they want to maintain their integrity and avoid jail time.
5-3. Describe the complex roles and relationships involved in a family business.
•Couples known as co-preneurs join in owning and managing a business together, which can strengthen or weaken their relationship. •A primary and sensitive relationship exists between a founder and her or his son or daughter. Some children decide to work outside the company to gain experience before joining the family business. •Siblings and other relatives may similarly strengthen or weaken their working and personal relationships through a family business. •In-laws play a crucial role in the family business, either as direct participants or as sideline observers. •The role of the founder's spouse is especially important, as he or she often serves as a mediator in family disputes and helps prepare the children for possible careers in the family business.
1-2. Distinguish between the terms small business and entrepreneurial opportunity.
•Definitions of small business are arbitrary, but we focus on firms that are small (fewer than 100 employees) compared to the largest firms in the industry, have mostly localized operations, are financed by a small number of individuals, and have growth potential. •An entrepreneurial opportunity is an economically attractive and timely opportunity that creates value both for prospective customers and for the firm's owners. Entrepreneurs relentlessly pursue an opportunity, in either a new or an existing enterprise, to create value while assuming both the risk and the reward for their efforts. They generally think differently about resources than do employee-managers. They even try to use other people's resources, which is called bootstrapping.
5-5. Describe the process of managerial succession in a family business.
•Discussing and planning the transfer of leadership is difficult and sometimes frustrating. •The quality of leadership talent available in the family determines the extent to which outside managers are needed. •Succession is a long-term process starting early in the successor's life. •The succession process requires actions and effective communication on the part of both the senior generation and the succeeding generation. •Transfer of ownership involves issues of fairness, taxes, and managerial control.
5-4. Identify management practices that enable a family business to function effectively.
•Good management practices are as important as good family relationships in the successful functioning of a family business. •Motivation of nonfamily employees can be enhanced by open communication and fairness. •Family retreats bring all family members together to discuss business and family matters. •Family councils provide a formal framework for the family's ongoing discussion of family and business issues. •Family business constitutions can guide a company through times of crisis or change.
3-5. Screen business ideas to identify those with the greatest potential.
•If too many new business ideas are generated, it will be necessary to use an idea screening process to determine which idea deserves more focused attention. •The screening of ideas can be performed quickly (usually in an hour or less) and should precede the decision to complete a feasibility analysis of the idea selected. •The five main factors considered in the screening process include the strength of the idea, the targeted market and customers, industry and competitive advantage issues, the founder's capabilities and fit with the new business, and capital needs and venture performance. •There are ways to test many new business ideas in part or "on the cheap," and the practicality of doing this is an important consideration in the screening process. •An idea can be revised and screened again if doing so will improve its projected viability.
4-3. Describe the process for evaluating a franchise opportunity.
•Independent third parties such as state and federal government agencies, the International Franchise Association, and business publications can be valuable sources of franchise information. •The primary source of information about a franchise is the franchisor. •Existing and previous franchisees are also good sources of information for evaluating a franchise. •Before becoming a franchisor, consider the efficiency of your business model, how you will finance growth, what expert assistance you will need, the content of your operations manual, government disclosure requirements, and your ability to add long-term value for franchisees. •A franchise contract is a complex document and should be evaluated by a franchise attorney, especially the provision relating to termination and transfer of the franchise. •The Franchise Disclosure Document (FDD) provides the accepted format for satisfying the franchise disclosure requirements of the FTC.
1-5. Describe five potential competitive advantages of small entrepreneurial companies over large firms.
•Integrity and responsibility: Independent business owners can build an internal culture based on integrity and responsibility that is reflected in relationships both inside and outside the firm, thereby strengthening the firm's position in a competitive environment. •Customer focus: Small business owners have an opportunity to know their customers well and to focus on meeting their needs. •Quality performance: By emphasizing quality in products and services, small firms can build a competitive advantage. •Innovation: Many small firms have demonstrated a superior talent for finding innovative products and developing better ways of doing business. •Niche markets: Small firms that find a distinct market segment of some type can gain an advantage in the marketplace.
2-1. Define integrity, and understand its importance to small businesses.
•Integrity refers to a general sense of honesty and reliability that is expressed in a strong commitment to doing the right thing, regardless of the circumstances. "Doing anything for money" can quickly lead to distortions in business behavior. •Many small business owners strive to achieve the highest standards of honesty, fairness, and respect in their business relationships.
3-1. Distinguish among the different types and sources of startup ideas.
•New market startup ideas are concerned with products or services that exist but are not present in all markets. •New technology ideas involve new or relatively new knowledge breakthroughs. •New benefit ideas are based on new and improved products or services or better ways of performing old functions. •Research shows that entrepreneurs claim prior work experience is the leading source of inspiration for startup ideas. •Personal experience leads many aspiring entrepreneurs to the startup decision. •Some entrepreneurs start their new ventures based on their hobbies and personal interests, which can add passion and energy to the enterprise. •Accidental discoveries may also provide useful ideas for startups. •Personal contacts, trade shows, research institutes, and trade publications are among other idea leads for startups.
2-4. Suggest practical approaches for building a business with integrity.
•The underlying values and the behavior of business leaders are powerful forces that affect ethical performance. •An organizational culture that supports integrity is key to achieving appropriate behavior among a firm's employees. Small firms should develop codes of ethics to provide guidance for their employees. •Many small companies join Better Business Bureaus to promote ethical conduct throughout the business community. •Following an ethical decision-making process can help entrepreneurs protect their integrity and that of their business.
3-3. Describe external and internal analyses that can shape the selection of venture opportunities.
•Outside-in analysis considers the external environment, including the general, industry, and competitive environments. •Opportunities arise for small businesses that are alert to changes or openings in the external environment. •Major trends in the general environment are economic, sociocultural, political/legal, global, technological, and demographic in nature. •The major forces that determine the potential attractiveness and profitability of a target industry include the threat of new competitors, the threat of substitute products or services, the intensity of rivalry among existing competitors, and the bargaining power of suppliers and buyers. •Inside-out analysis helps the entrepreneur to understand a startup's sources of potential strengths and the unique competencies that can be formed from them. •Tangible resources are visible and easy to measure, whereas intangible resources are invisible and difficult to quantify. •Capabilities refers to a firm's routines and processes that coordinate the use of its productive assets to achieve desired outcomes. •Core competencies are those capabilities that can be leveraged to enable a firm to do more than its competitors, thereby leading to a competitive advantage. •A SWOT analysis provides an overview of a firm's strengths and weaknesses, as well as opportunities for and threats to the organization. •The entrepreneur's "opportunity sweet spot" is found at the point of overlap of emerging potentials in the external environment and the unique strengths and capabilities of the entrepreneur and the venture.
1-3. Explain the basic characteristics of entrepreneurs, and describe the different kinds of entrepreneurship.
•Research suggests that there are desirable and undesirable qualities of entrepreneurs. •Desirable characteristics include commitment and determination, a focus on honesty in business relationships, awareness of market and customer needs, tolerance of risk and uncertainty, creativity, self-reliance, adaptability, and a motivation to excel. •Undesirable characteristics include overestimating one's ability, lacking an understanding of the market, taking oneself too seriously, having a domineering management style, and failing to share business ownership in an equitable way. •"Pure" entrepreneurs are often considered to be the founders of new businesses that bring new or improved products or services to market. •Second-generation, or "second-stage," owner-managers are similar in orientation to founders. •Franchisees differ from other business owners in the degree of their independence. •An entrepreneurial team consists of two or more individuals who combine their efforts to function in the capacity of entrepreneurs. •Social entrepreneurs engage in activities with the goal of improving society. •Women entrepreneurs are competitive business owners who are doing extraordinarily well in the fields of health care and educational services.
2-5. Define social entrepreneurship, and describe its influence on small companies and startup opportunities.
•Researchers have defined social entrepreneurship as "entrepreneurial activity with an embedded social purpose." •Social entrepreneurship continues to gain momentum and leads to innovative solutions to society's most pressing needs, problems, and opportunities. •Social entrepreneurs focus on an expanded set of priorities—a triple bottom line, which takes into account a venture's impact on people, profits, and the planet. •A sustainable small business is a profitable company that responds to customer needs while showing reasonable concern for the natural environment. •Environmental regulations adversely affect some small firms, such as dry cleaners. •Win-win outcomes are possible in many cases—the cost of eco-friendly business practices can often be more than offset by operational savings, increased customer interest, and reduced paperwork, for example. •The SBA, the EPA, and other public and private resources stand ready to help small businesses comply with environmental regulations. •Small companies are sometimes launched precisely to take advantage of opportunities created by environmental concerns. Creating environmentally friendly products and services requires creativity and flexibility, areas in which small businesses tend to excel.
2-3. Identify some common challenges and benefits of maintaining integrity in small businesses.
•Small firms' limited resources and desire to succeed make them especially vulnerable to allowing or engaging in unethical practices. •Startups and small companies sometimes resort to telling legitimacy lies, but they can win customers and attract other important stakeholders by paying close attention to the PRO factors (those related to the firm's products, its representatives, and the organization itself). •Use of the Internet has highlighted ethical issues such as invasion of privacy and threats to intellectual property rights. •Cultural differences may complicate ethical decision making for small firms operating abroad. The concept of ethical relativism is troublesome because it implies that ethical standards are subject to local interpretation. •Research supports the notion that ethical business practices are good for business. When customers and employees trust a small company to act with integrity, their support can help keep the company going.
5-2. Explain the forces that can keep a family business moving forward.
•The organizational culture of a family business is composed of the patterns of behaviors and beliefs that characterize a particular firm. •The founder often leaves a deep imprint on the culture of a family firm. •The long-term survival of the business is dependent on the commitment of family members. They may be committed to the family business for different reasons, and these reasons will likely determine the nature and strength of that commitment.
4-2. Understand the pros and cons of franchising.
•The primary advantage of franchising is its high probability of success. •Other advantages of franchising include the value of trade names and trademarks, the franchisor's operations manual, training support, immediate access to supply lines and purchasing power, and financial support. It also is a way for existing businesses to diversify. •Churning is the action by franchisors to void the contracts of franchisees in order to sell the franchise to someone else and collect an additional fee. •Encroachment is the franchisor's selling of another franchise location within the market area of an existing franchisee. •Disadvantages of franchising include financial issues, franchisor competition, and management issues. •Costs associated with franchises include franchise fees, investment costs, royalty payments, and advertising costs.
Define the terms family and family business.
•The word family refers to a group of people bound by a shared history and a commitment to share a future together while supporting the development and wellbeing of individual members. •A majority of businesses in the United States and other countries with free-market economies fit some definition of family ownership. •A family business is an organization in which either the individuals who established or acquired the firm or their descendants significantly influence the strategic decisions and life course of the firm. •A family business can be described as an owner-managed business, a sibling partnership, or a cousin consortium.
1-4. Discuss the importance of understanding your motivations and perceptions related to owning a small business.
•Understanding clearly why you want to own a small business and what motivates you are vital to eventually achieving fulfillment through your business. •Friends and family who own or have owned businesses can be influential in your decision to start a business. •Entrepreneurship often provides an attractive alternative for individuals fleeing from undesirable job situations. •One of the primary reasons for becoming an entrepreneur is gaining personal fulfillment through making the world a better place. Other reasons include achieving personal satisfaction, independence, and financial rewards. •Three personalities come into play when you are starting a business: the technician personality, the manager personality, and the entrepreneur personality. •The technician personality dislikes managing, wanting instead to be left alone to get the job done, and lives in the moment, without thinking of the future. •An individual with a manager personality is pragmatic, assuming responsibility for the planning, order, and predictability of the business. •The entrepreneur personality is able to see the big picture and develop strategies that will help the business become successful.